1. Field of the Invention
The invention relates to a system, method and computer program product for assigning, apportioning and/or characterizing cash flow or asset interest streams from a financial product such as a loan in the primary or secondary mortgage market, to a plurality of accounting entries or entities each having an interest in at least a portion of the cash flow or asset interest streams, to thereby distribute the cash flow or asset interest among a plurality of accounts by applying a “chart of accounts template” (CoAT) to the cash flow or asset interest stream. The invention includes setting-up a template of accounts and/or distributees by analyzing one or more attributes associated with the cash flow or asset interest stream and/or diagnosing a payment to determine if a business event or payment event has taken place, and assigning a new account template or changing the account template if a trigger for a different account template is detected.
2. Description of the Related Art
The market for financial products is an important element of the modern global economy. Participants from all over the world are able to secure, underwrite, guarantee, loan, etc., money and other fungible goods through financial products that allow the characterization and distribution of the cash flows and/or asset interest streams associated with an asset such as money, goods, property, and/or loans. The cash flow and/or asset interest streams associated with the asset may then be traded in secondary markets.
A cash flow stream may include a continuing flow of payments, which may be periodic such as a stream of scheduled or unscheduled, predictable payments. A cash flow stream may also be one or more payments that may be the same or different and occur with irregular frequency. Examples of cash flow streams include licensing or royalty payments, interest payments on a loan, accounts receivable, annuity, dividends, etc. An asset interest stream is a flow of any interest (monetary or otherwise) that continues for a predetermined or indefinite period and may be derived from an asset or associated with an asset. Examples of asset interest streams include shares in a property, corporation, or a loan other tangible or intangible item of value.
A mortgage is one example of an asset that may have a cash flow stream associated with it. While the present invention is not limited to the processing of loans (as it covers the processing of other securities and asset streams), home mortgage loans will be used as an illustrative example of conventional cash flow processing. The mortgage can be considered an asset by the party (e.g., a financial institution) that has beneficial ownership rights to the loan (i.e., the lender, purchaser of a loan, or entity that has an ownership interest in a mortgage-backed security). In the example of a mortgage, the cash flow stream of the mortgage includes the interest and principal payments and/or fees made by the borrower to the owner of the loan. Mortgages have been described in detail (see for example Guttentag, J., “Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls,” CWL Publishing, Enterprises Inc. Madison Wis., 2004, and FREDDIE MAC FACTBOOK, 2005, pages 1-105, available at www.freddiemac.com, the entire contents of each of which being incorporated herein by reference).
In different respects, primary and secondary mortgage markets function to provide loans to individuals and/or to resell loans to investors, respectively. The secondary market pools and repackages loans for resale. In the secondary market, loans are often characterized by the cash flows associated with the loan. The cash flow stream and/or the loans may be resold to investors in their entirety or only a portion of an interest in a certain loan may be resold (e.g., only a fraction of the total cash flow stream may be sold to another party). Loans may be resold to investors in the secondary mortgage market through products such as REMICs (real estate mortgage investment conduit) or other mortgage backed securities (MBS).
A loan may be represented by at least three components including the borrower, the property, and the note (e.g., the contractual terms that define the borrower's and lender's obligations for exchange of the cash flow stream). A virtual model of a loan is shown as FIG. 1. Each of the borrower, the property and the note may be represented by specific associate data sets, that provide the basic initial information about the loan. The borrower, note, and property data may be characterized as inherent attributes of the loan.
In the past, a single financial institution may have assumed responsibility for all aspects of a loan including, for example, evaluation of the underlying property (i.e., the asset acting as collateral for a loan), collection of the borrower's payment, and determination of the borrower's creditworthiness. Today each of these and other functions of the loan selling, marketing, underwriting, servicing, and pooling processes may be handled by different entities, each of which is an expert in a particular aspect of the loan. In a modern financial market, when an individual borrows money, for example for the purpose of purchasing a home, all of the aspects of any individual loan are rarely managed by a single entity. All the asset interests can be owned and managed by more than one entity. Likewise, in the secondary mortgage market the investor or reseller of the loan out-sources many of the tasks associated with maintaining, servicing and accounting for any particular loan.
Different aspects of a loan (e.g., portions of the borrower's payments representing the loans cash flows) may be alienated or separated from the original loan or original loan agreement (e.g., the agreement made between the borrower and a lending party such as a financial institution and a bank). In many cases individual loans are collected and the cash flow streams (e.g., the borrower's payments) are passed through from the individual loan and pooled for efficiency and ease of handling. The total cash flow (e.g., borrower's payments) or any portion of the incoming or outgoing cash flows and/or debt obligations of the pool may be sold to other financial institutions or any third party. The cash flow streams or asset interests remain associated with the underlying loan or financial product and may be traced to the original borrower or lender while still being divided and owned or managed in multiple representations.
The financial accounting that records and tracks cash flow payments from borrower to lender, lender to financial institution, servicer to investor may be represented by a series of interconnected cash flow streams. In order for any party participating in, for example, the loan management process to properly track and record the cash flows of a loan or loan pool, certain accounting practices and automated systems conventionally have been used. Conventional systems (hereinafter legacy systems) typically contain hard-coded calculations, logic gates and instructions for dividing and assigning portions of cash flows streams and/or payment streams to the parties that have an interest in the loan or that are otherwise associated with any particular loan transaction. For example, in a legacy system when a borrower makes a loan (i.e., when a borrower undertakes a commitment to make a periodic stream of payments according to the terms of a contract), certain variables are preset in the loan's contractual requirements. Such conditions may include the interest rate, payment periods, penalties, etc.
A servicer or financial institution managing the loan may record the borrower's payments (e.g., the incoming cash flow stream) and credit certain related parties (e.g., represented by account entries) with payment for their services and/or fees associated with the loan. For example, an investor's fees may include payment for items such as a guarantee fee, while a servicer's fees include compensation for managing and accounting for loan activity.
In order to organize the incoming cash flow stream and accurately make payments to the different parties involved in the collection and maintenance of a loan, the servicer, using a legacy system, may have automated the process of recording the incoming cash flow and outgoing payments in a manner such that the incoming cash flow stream was immediately apportioned to all parties requiring payment for maintaining or servicing the loan. The cash flows and payments in legacy systems were distributed by way of, for example, a distribution formula that calculated the share of the cash flow stream owned or transferred to any party. Such legacy systems include MIDAS, SAP as well as servicing systems such as Fidelity's MS Papp.
The processes of legacy systems are typically hard-coded and offer little or no flexibility with respect to changing the distribution formula. As recognized by the present inventors, legacy systems, because of their inability to rapidly change the account structure of the cash flow or asset interests of a financial product (e.g., the distribution formula), hinder the ability to tailor financial products derived from or associated with unconventional cash flow or asset interest streams. This drawback of legacy accounting systems represents a significant problem for loan products or mortgages in the primary and secondary market. The inability of legacy systems to quickly add or change the distributees of a payment stream has hampered the development of new financial products and has made it difficult, time consuming, and expensive to change distributees even when there is a clear financial incentive to do so (for example when a loan can be managed in a more economical manner by adding a new distributee for a specialty service). Legacy systems have restrained the market to only a limited number of products that must be “shoe-horned” into the demands of a customer base of very diverse borrowers that may have widely varying income and payment periodicity characteristics. Offering flexibility in cash flow or asset interest management enables a variety of sophisticated financial borrowing products previously less widely offered.
Legacy systems may inhibit competition between lenders because the cost of changing any particular distributee is so burdensome and time-consuming that it becomes economically impractical. Thus competition between loan servicers is not maximized and the demand for new loan servicing products and/or services may be left unfilled. Moreover, savings that could otherwise be realized by more efficient financial systems are not available to encourage the marketing of new loans tailored to certain borrowers who may otherwise not be able to qualify for a loan.
Legacy systems make it difficult to accommodate changes to existing loans during the life of the loans. For example, in the past, an individual may have borrowed from a financial institution with original loan conditions that included monthly payments. If the borrower wished to change to bi-weekly payments it may not have been possible to accommodate the change to the individual's loan without substantial difficulty and new coding, a cost that would eventually be passed to the borrower making the new loan less attractive economically.
Thus, the present inventors recognized that the inability to quickly react to change and accommodate new and/or changed conditions such as the distributee structure is a substantial drawback of legacy systems or alterations in payment frequency that prompt the adjustment of accounting rules.
Martin Fowler discusses complex accounting systems and the use of posting rules to assign certain properties, characteristics, and/or features to an element of an accounting entry in “Analysis Patterns: Reusable Object Models,” Addison Wesley Longman, Inc., Reading Mass., 1997 (incorporated herein by reference in its entirety). By assigning a posting rule to a cash flow stream, components of the cash flow stream may be divided (e.g., distributed) to different accounts. The posting rules of the Fowler model may be permanently assigned or hard-coded so that the same rule always applies to a particular cash flow stream. Even though the same rule may be used in the Fowler model, because the Fowler posting rule may have different sub-elements, it is possible that any particular cash flow stream may be treated differently depending on the sub-elements of the posting rule set.
The Fowler model may not be sufficient for handling the demands of many modern accounting systems such as those for modern financial products where any particular posting rule may need to be changed and/or substituted with a different posting rule on a real-time basis. Further, the Fowler system does not provide a way of globally organizing posting rules so that they may exist in a single database and may be subject to bulk or global editing.
The Fowler model also does not provide a process wherein the selection or change of a posting rule is automated. While Fowler may describe the construction and organization of a base accounting system that assigns posting rules to incoming cash flows, it may not be possible to implement the Fowler system on a practical level because it does not provide an option for automating posting rules or for including posting rules in an organized sub-family for application to a cash flow stream interchangeably with other rules in conjunction with a logic system that may rely on one or more business events for choosing a particular accounting scenario or posting rule.
Further, the Fowler model does not self-assign distribution values, account templates or accounting rules to an incoming cash flow stream. Instead, the distribution values and/or accounting rules are preassigned and/or hard-coded by an operator.
As recognized by the present inventors, a method in which the cash flow distributions to different distributees (e.g., accounting entries/entities) can be readily and quickly changed would offer an advantage to all participants of a loan including the ability of the loan's beneficial owner to find parties to carry out activities such as servicing to obtain the lowest cost services for any particular sub-cash flow stream. One way to achieve flexibility in assigning new distributes to loans in the primary and secondary markets is by changing the basic properties and structure of the loan. This would however substantially complicate the primary and secondary mortgage markets' systems and usual business processes.
While working to solve the problems of legacy systems, the present inventors have determined that one way to provide flexibility with regard to assigning portions of the cash flow streams of a mortgage to the distributees of the mortgage is to associate a cash flow template with the cash flow stream associated with the loan (associate a cash flow template with the borrower's payments). Such a template would provide a readily configurable and flexible set of rules for directing cash flow streams to particular parties and/or accounting entries. The template may include, for example, definitions for the cash flow distributions as defined by various contracts to the servicer, a guarantee fee, and any number of additional sub-cash flow streams which may go to the same or related parties. Because the cash flow streams of the loan are not changed in the primary mortgage market any changes to cash flow streams must be carried out in the template. Therefore the template provides a readily configurable way for redistributing cash flows, securitization obligations, service fees, principal payments and interest payments to any number of different parties.